The recovering US economy and booming stock market brought luxury spending back in 2013. According to Credit Suisse, the US created 94% of the new millionaires in the world over the past year and these millionaires, in turn, backed up the North American luxury goods market making the region a global hot spot for high-priced luxury sales. This healthy spending on luxury items brought prosperity for Michael Kors Holdings (KORS) as the company's top line activities grew 39% year-over-year during its second quarter of FY14 that ended September 28, 2013.
The company has grown its North American market share by 13% and has become the biggest challenge for the current market leader Coach (COH) that holds 30% of the market share. Through effective portfolio diversification and enhancing its presence in department and specialty stores, Michael Kors has been successful in grabbing Coach's market share. Michael Kors' revenues are growing by leaps and bounds whereas Coach's revenues are constantly falling.
The table below shows the YoY sales growth of both companies during the latest reported quarters ending September 28, 2013. Michael Kors' sales in both its North American and International segments have boosted considerably, whereas Coach experienced declining sales in both segments.
Source: SEC Fillings
The North American comparable store sales of Michael Kors increased 24.7% while the comparable store sales for Coach in this region declined 6.80%. Michael Kors' sales perked up because the company expanded its portfolio from fashion to beauty and launched a line of cosmetics, scents and body products. The line is split into three collections: Sporty, Sexy and Glam, in order to satisfy the needs of all customers.
The company's accessories line and footwear was positively met by customers in this quarter and resulted in an increase in the company's retail and wholesale revenues while the watches lines increased the company's licensing revenues.
Michael Kors' revenues are projected to grow at a greater pace in 2014 as US consumers continue to the boost sales of the top luxury companies. The CEOs of these luxury brands expect the market to be grow by an average of 9% in 2014 and reach $260 billion in the coming years.
Besides the North American market, the company will receive a boost from the Western and Eastern European markets as they are also projected to grow in 2014 at a healthy rate. But to keep the revenue growth healthy, Michael Kors needs to continuously upgrade its product portfolio by considering consumers' tastes and preferences, otherwise it will be facing Coach's current challenges.
The only market in which the revenues growth is expected to remain stagnant is in Japan, but since the company generates a very small portion of its revenues from this segment there would not be a significantly negative impact on next year's revenues.
Bottom Line Growth
Michael Kors' profits during the third quarter of 2013 perked up due to higher North American and International sales. Along with revenue growth, the company's margins also enabled it to improve its YoY net profits. The company's 82.09% year-over-year net income growth during the third quarter was really amazing and reflected management's hard work and efficiency.
The company's gross margin improved by 150 basis points as the cost of goods sold as a percentage of sales declined this quarter. However, Coach's gross margin is still significantly better than Michael Kors' as Coach manages to sell its products at lower costs.
Michael Kors was able to offset the negative impact of these higher costs through lower selling, general and administrative and lower interest expenses as a percentage of sales than Coach. Michael Kors' SG&A and interest expenses were 28.67% and 0.03% respectively compared to Coach's 43.88% and 0.14%.
The company's year-over-year interest expenses significantly declined by 61%because it reduced its borrowings. The expense for this period was largely comprised of commitment fees and the amortization of deferred borrowing costs.
Healthy Balance Sheet
Currently, Michael Kors does not have any debt on its balance sheet, which means it has a debt-to-equity ratio of 0. The company also has a very impressive liquidity position as indicated by its current ratio of 6.2 and quick ratio of 4.3.
Michael Kors has the ability to generate more money on the investments made by shareholders compared to its other peers in the industry, but the company's profitability is slightly below the industry leader, Coach, as indicated by the return-on-equity and return-on-invested capital of both companies.
However, with regards to Michael Kors' profitability, relative to its assets, the company is more profitable than Coach and the overall industry average.
The company's management is improving its margins by reducing costs and expenses as a percentage of sales so I expect that its ability to generate money on shareholders' investments will improve in the coming future.
Currently, Michael Kors does not pay dividends so the only way that investors can make money is through the company's stock price which appreciated a little more than 57% last year. On the other hand, Coach's stock price appreciated by only 0.63%.
There are a number of catalysts that may increase the growth rate of Michael Kors' future earnings including the positive outlook in both the North American and European markets, the company's diversified portfolios and its effective strategies to target the market and position its products. Through these strategies, Michael Kors should be in a strong position to grab more market share from Coach.
Moreover, the company's improving margins, better liquidity position and zero debt level would further give the company and its investors, advantage in the long run and result in the appreciation of the stock price to a greater extent.